On Capitalism, Democracy and Welfare (Part I)

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The topic of the final week of November’s radio show America Tonight was the bal­ance in socio-political issues in the soci­ety. A guest was asked how the Demo­crats and Repub­lic­ans fit together in the soci­ety and sub­sequently respon­ded to these ques­tions in a broad way, arguing that both dis­par­ate ele­ments are needed in our soci­ety.

In rela­tion to Amer­ica, the guest believes that we should not insist on the period of 1940s, a period in which social wel­fare prin­ciples were fully pre­served in a soci­ety con­sist­ing of selfish and self­less people. He con­cluded with the idea that we need some people from right and some from the left at the same time. The issue, at first glance, may seem fuzzy since the guest was given a lim­ited time to answer these com­plex ques­tions. Yet, he man­aged to focus the atten­tion of the listener on a single point: bal­ance in society.

Although this debate was intrinsic to Amer­ican soci­ety, it fits European soci­ety just as well. Indeed, by ana­lyz­ing the choices of policies Europeans have made in the past, one would derive sev­eral out­comes when one delves fur­ther into the “bal­ance” issue.

What shapes the cur­rent European policies are, of course, the motions roughly derived from social­ism and cap­it­al­ism. These motions are best indic­ated in the mag­num opus of Joseph Schum­peter; Capitalism, Socialism and Democracy. Innov­a­tion is the essence of cap­it­al­ism, mak­ing it sus­tain­able in the eco­nomic sense. On the one hand, loc­at­ing him­self in the middle of these argu­ments as “a doctor free from bias”, Schum­peter argues that Cap­it­al­ism is not sus­tain­able in a broader sense, as its insti­tu­tions will col­lapse in the end due to moral destruc­tion. This is des­pite the fact that the sys­tem appears to be a mech­an­ism that is totally cap­able of rais­ing the stand­ard life for the people.

On the other hand, he argues that demo­cracy and social­ism fit together in prac­tice. This view is in con­trast with the dis­course of social­ism, how­ever: although social­ists view demo­cracy and social­ism as com­ple­ment­ary, Schum­peter calls this argu­ment “a bourgeoisie approach”, for its dis­course con­tains revolu­tion­ary and author­it­arian (such as pro­let­arian dic­tat­or­ship) atti­tudes. The main issue here is the bal­ance in the soci­ety. Pre­dict­ing the col­lapse of cap­it­al­ism for its trouble­some insti­tu­tions, the Schum­pe­t­erian view surely advoc­ates the idea that cap­it­al­ism would have been sus­tain­able if, and only if, a bal­ance exists in the cap­it­al­istic activities.

Let me take this issue a step fur­ther. The above-mentioned bal­ance is closely related to the way post-industrial demo­cra­cies work in the con­tem­por­ary world sys­tem. Her­bert Kitschelt, a polit­ical sci­ence scholar, pos­its that post-industrial demo­cra­cies had passed through a trans­ition pro­cess -from agrarian to cap­it­al­ist mar­ket economies- in the nine­teenth cen­tury. In some coun­tries, for instance, author­it­arian regimes sup­por­ted the indus­tri­al­iz­a­tion pro­cess, whilst oth­ers fol­lowed mixed routes to reach indus­tri­al­iz­a­tion.

All these states either adop­ted a coordin­ated market-economy sys­tem or a lib­eral one, and both have shaped the cur­rent eco­nomic per­form­ances of post-industrial demo­cra­cies, espe­cially in Europe. When it comes to the European states, there are more over­lap­ping areas between the bal­ance issue and eco­nomic cir­cum­stances. For instance, the aus­ter­ity plans have long been dis­cussed by policy makers and polit­ical eco­nom­ists due to its con­tra­dic­tion with the tra­di­tion­ally pro­tect­ive European social policies.

Two extreme opin­ions, one in favor of strict aus­ter­ity plans and the other in favor of an increase in social expendit­ure, would hardly be in con­sensus. Moreover, what triggered the cur­rent eco­nomic tur­moil was the absence of a bal­ance between post-industrial demo­cra­cies and their eco­nomic policies. There­fore, the imbal­ances can be addressed not only in the after­math of the European crisis, but also at the very begin­ning of it.

Although post-industrial demo­cra­cies are very close to each other in the eco­nomic sense, they dif­fer greatly in policy mak­ing. Indeed, accord­ing to Kitschelt (2009)[1], Coordin­ated Mar­ket Eco­nom­ies (CME) score very high in job secur­ity and unem­ploy­ment insur­ance, whilst Lib­eral Mar­ket Eco­nom­ies (LME) score low in both. CMEs are also good at redis­tri­bu­tion in com­par­ison to LMEs. How­ever, LMEs usu­ally adopt some policies to over­come rigid labor mar­kets in order to increase prof­it­ab­il­ity, which raises the inequal­ity and poverty at the same time. In that regard, we find it hard to com­pare these two cap­it­al­istic mod­els in terms of their achieve­ments.

Yet, what I would like to under­score is a dif­fer­ent mat­ter: the absence of a bal­ance in the policy mak­ing of post-industrial demo­cra­cies has left great impact on their poverty and con­sump­tion levels. Kitschelt claims that con­tin­ental European CMEs need to increase their invest­ment levels in gen­eral edu­ca­tion for bet­ter growth rates and tech­no­lo­gical innov­a­tion. Also some CMEs should decrease their private con­sump­tions to alloc­ate more resources to social expendit­ure.

The most com­mon fea­tures of LMEs are low num­bers of pub­lic firms and high private con­sump­tion. Hav­ing increased inequal­ity in the soci­ety, LMEs should now focus more on social policies to bal­ance their ‘social defi­cits’. Lastly, LMEs and CMEs dif­fer greatly in their bal­ance of trade (exports minus imports). In this sense, it appears that Scand­inavian and con­tin­ental European soci­et­ies are thrifty (tend to export more and import less), whilst Anglo-Saxon soci­et­ies are spend­ers. These socio-economic form­a­tions have also left sig­ni­fic­ant impacts on the demo­crat­iz­a­tion pro­cess, in which more demo­cracy can be attrib­uted to more equal­ity in the society.

The bal­ance issue can eas­ily be exten­ded by tak­ing into con­sid­er­a­tion some other factors in the broad ana­lysis. The exist­ing lit­er­at­ure has set an import­ant illus­tra­tion of how to define social changes accord­ing to both mar­ket sys­tems and social policies. Imbal­ances lead to socio-economic prob­lems wherever they occur, and their impacts should not be underestimated.